Tax Patents: until Legislation banning patents is certain, CPAs should be prepared.

• Author: Primoff, Walter M.
• Position: PROFESSIONALISSUES

Recent actions of the U.S. Patent and Trademark Office are poised to present CPAs and other tax practitioners with a new set of challenges.

A landmark judicial decision in 1998 resulted in the PTO, for the first time, issuing patents for "novel" business methods (State Street Bank & Trust v. Signature Financial Group, Inc.). Based on that decision, the PTO determined that novel tax strategies qualify as patentable business methods. Since then, more than 60 patents for tax strategies have been granted and 89 tax patent applications are pending.

The best known of the tax strategies patents is the so-called "SOGRAT." This is likely because Grantor Retained Annuity Trusts (GRATs) have become a mainstay of tax planning for high-net-worth individuals, and was the first tax strategy patent in litigation.

The SOGRAT is a type of GRAT that is funded with non-qualified stock options. The patent holder, Wealth Transfer Group LLC, sued Aetna CEO John W. Rowe for infringement. The suit was settled in March 2007 without the court deciding whether the patent was valid. However, without a holding that the patent is invalid, there is a presumption of validity.

The SOGRAT patent was issued in 2003 and can be downloaded from the PTO's website, www.uspto.gov.

WHAT'S BEING DONE?

CalCPA and the AICPA have both written Congress opposing tax patents. Most recently, CalCPA wrote to Max Baucus, chair of the Senate Finance Committee, July 23 in opposition to tax patents because they:

* Mislead taxpayers into the belief that a patented strategy is valid under the IRC when, in fact, a patented strategy offers no additional assurance of compliance with the IRC;

* Complicate the government's administration of the IRC;

* Make taxpayer compliance more difficult; and

* May cause many taxpayers to pay more tax than others in identical circumstances.

"Tax strategy patents should be restricted, or at a minimum, taxpayers and tax practitioners should be made immune from liability for tax strategy patent infringement," concludes the AICPA's report, which was sent to Congress in February and is available at http://tax.aicpa. org/Resources/Tax[+]Patents.

LEGISLATION

Both organizations support the recent emergence of Section 10 of HR 1908, a provision that makes tax-planning methods not patentable and was voted on July 18 by the House Judiciary Committee to be included in the Patent Reform Act of 2007.

The provision applies to all levels of taxes and would take effect the date of...